Liquidity, valuations, fundamentals - all turning positive for microcaps, sentiment remains the last hurdle

Microcaps in focus.

• Three of four factors for a micro cap rally are already in place
• Valuations reset to 10-year averages after a 30-35% correction
• Sentiment remains the missing trigger for a micro cap rally

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Three out of four factors needed to ignite a micro cap rally are already in place. Liquidity is building, with SIP allocations to small caps rising from 10-11% to nearly 14-15% of monthly flows. Fundamentals are holding, with manufacturing companies delivering double-digit operational growth. And valuations, after a brutal 30-35% correction over 15-18 months, have reset to 10-year averages — with select stocks now trading at a discount to those levels.

Historically, every time this valuation setup has emerged, forward 12-month returns have been in the range of 40-70%, according to Pawan Bharaddia of Equitree Capital Advisors who focuses on the Rs 1,000 to 5,000 crore market cap space. He was speaking at the Crystal Gazing Summit, organised by PMS AIF WORLD.

So what's missing? Sentiment. And in micro caps, sentiment isn't just one factor, it's the ignition switch.

Bruised retail investors, persistent FII selling, and the growing allure of global markets have kept confidence suppressed even as the underlying numbers improve. Bharaddia believes the turning point will come not from one dramatic event but from a few positive signals arriving together — tariff clarity, geopolitical calm, and continued earnings recovery.

On fundamentals, the numbers speak for themselves. Manufacturing companies — a significant chunk of the micro and small cap universe — have been delivering double-digit operational growth. This was reflected in the GDP data released around the time of the conference, which showed manufacturing growth of nearly 18%. The earnings story, at least at the operational level, remains intact.

On valuations, the correction has done its work. After a sharp 30-35% decline over 15-18 months, valuations in this segment have been dragged back to their 10-year historical averages. In select pockets, stocks are now trading at a discount to those averages — a relatively rare occurrence that has historically preceded strong forward returns. Bharaddia cited evidence suggesting that every time this valuation setup has emerged, the following 12 months have delivered returns in the range of 40-70%.

PMS AIF WORLD is India’s leading wealth services firm specialising in alternative investments, serving over 800 clients across Rs 2,200 crore in PMS and AIF assets. The firm follows a knowledge-first philosophy with the belief that when knowledge leads, wealth follows, and it focuses on delivering well-informed investing for its alpha seeking clientele.

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